When investors think of a public offering they picture a private company becoming a public company or an already public company requesting more money from investors. Initial public offerings are often very attractive to private entities because of the large premiums that investors are willing to pay. As a result, companies filing IPO's are able to raise money that far outpaces their intrinsic value. After all, an IPO is an opportunity for a company to raise money that can then be used to aid in additional growth. However, offerings for a public company are typically not looked upon with much optimism. Depending on the industry, it can be viewed as a sign of weakness or a warning sign for investors to avoid the company.
The biotech sector is a unique area to invest in through these offerings, as many of these companies need additional cash because they are construed as developmental phase companies. As a result, when a biotech company announces an offering, whether it is public or private, the stock can experience a dramatic fall, an oversold situation often develops. Some biotechnology companies have candidates or technologies with proven results that have the ability to save lives, but are plagued with a lack of money to properly develop the drug. Therefore, the offerings become necessary, and as clinical data remains strong, the stock often recovers to post large gains for those who take advantage of the value- presenting price following an offering.
During the first quarter of this year several companies raised money through public offerings. According to Biocentury's quarterly stock roundup, the biotechnology industry raised $8.3 billion in the first quarter. More than half being raised in activities other than IPO's, follow-ons, and venture rounds. The following chart gives a breakdown on how biotechnology companies received money in Q1:
The category I have marked as "other" is typically the types of offerings that result in significant loss. When a company files for its IPO it keeps the proceeds. Over the last year, the proceeds have been significant because of large IPO valuations. We often look for venture rounds to see where the institutional investors are placing their money. A Follow-On dilutes shares, which is one reason these offerings are so frowned upon. It is another way for companies to raise additional cash after an IPO. The "other" category consists of a number of offerings that may include debt, warrants, notes, common stock, etc., and are all used as a way for a company to raise additional cash. Following are selected stocks where financing caused immediate loss but has since produced large gains for investors who were patient.
- Celldex (CLDX) announced a public offering on February 23 and its stock fell from $4.36 to $3.79 in the five days following the announcement. The company priced shares at $3.85 and raised $37.7 million. It has since recovered and is trading at $4.40 thanks to optimism surrounding its Precision Targeted Immunotherapy Platform.
- Amarin (AMRN) announced a public offering of American Depositary shares at $7.60. The company raised $100 million and is now trading at $11.25 just four months later.
- On January 4 Arena Pharmaceuticals (ARNA) entered into a securities purchase agreement and priced shares at $1.65. The stock dropped from $1.95 to $1.60 in the four days following the announcement, but the company still raised over $30 million. Investors who purchased shares are now enjoying massive gains with the stock trading at $6.60 following a nod for approval of its weight loss drug.
- Repros Therapeutics (RPRX) entered into a direct offering and priced shares at $4.50 on January 27. This resulted in the price of the stock declining from $5.11 to $4.50 in just 5 trading sessions. However, the stock is now priced at $7.40 and the company was able to raise over $11 million.
Speculation is what drives biotechnology stocks and far too often we investors over think the reasons for an offering. In my opinion, the upside in biotechnology has never been greater. Therefore, during periods of volatility, investors can buy undervalued stocks that have the potential to rise. In biotechnology, stocks have the ability to double in a matter of days; with technology that continues to evolve, every loss may be an opportunity for gains.
Sometimes an offering works out well for both the company and the investor. It presents investors the opportunity to buy cheaply and gives companies the cash needed to continue funding its operations. There is a fear amongst investors that all offerings are bad for the stock. Although it does dilute the stock, it can also provide opportunity for those who buy at undervalued prices. Following are some small biotechnology companies with recent financing and strong clinical developments that have traded lower following an offering. It's impossible to know if any of these stocks below will return the level of gains as the stocks above, but in my opinion the recent round of financing has pushed each of the following stocks significantly below its worth.
On April 5 NeoStem closed its public offering and raised $6.8 million. The offering had a horrible effect on the stock, causing it to drop from $0.51 to $0.37 with a market cap of just over $40 million. The stock is now priced at $0.36 and has traded relatively sideways, reaching a low price of $0.30. This company operates in several segments with a late- stage candidate, AMR-001, for the treatment of acute myocardial infarction. It also manufactures cell therapies for various companies. Following any FDA approvals, the company could return significant back end revenue from royalties of the candidates that it helps to develop. I think the stock is significantly undervalued with the potential to return substantial revenue in the near future as a result of it manufacturing several late- stage candidates. It currently returns over $70 million in revenue and owns a 50% stake in a Chinese generic pharma, Suzhou Erye Pharmaceutical Company, which is believed to be valued at greater than the company itself. The value in this company exists due to its potential revenue from both its own candidate and the cells it produces, along with the generic pharmacy business, which could provide a very large sum of cash. I think this is a stock worth watching and it won't take much for it to trade significantly higher.
OncoSec Medical (ONCS.OB)
OncoSec Medical is another stock with a valuation that appears senseless. The company has announced nothing but positive news from its clinical trials and is using a technology that could be transcendent. Yet, one of the necessary requirements of survival is cash and the company has had a hard time with financing, which is why it trades with such a low valuation. However, the company just raised $7.8 million from institutional investors, which should allow it to move forward with the advancements of its pipeline. The company uses a process called electroporation which uses electrical currents to increase the porosity of tumors when used in conjunction with an immunotherapy or chemotherapy agent: ElectroImmunotherapy and ElectroChemotherapy, respectively. Its treatment has proven itself to be safe and effective in treating a number of different cancers with its ability to increase the uptake of an agent by up to 4,000-fold. Thus, I believe this is a stock to watch. It has the potential to have successful approaches in the immunotherapy and chemotherapy fields against cancer.
Horizon Pharma (HZNP)
HZNP is a very interesting stock because it already has an approved drug, a very strong cash position to market its drug, and is trading with very attractive metrics. The company completed two rounds of financing in February and March, and until Monday, the stock had traded flatly since raising over $80 million in net proceeds. The company is highly controversial, as some believe its new drug DUEXIS could become a bust. In a recent article, Bret Jensen noted that 2,700 physicians have already prescribed the drug. Neither of its two drugs are potential blockbusters but they could generate revenue in the $50-$150 million range. One thing is for certain; the company has cash and is trading with a market cap of just $134 million. It may be worth the buy, but I wouldn't expect anything special in terms of long-term performance.
Oncothyreon is a stock that I have watched with great interest over the last year with expectations for its lead candidate, Stimuvax being quite high. However, all optimism abruptly shifted to pessimism when the company prolonged the results from its Phase III trials until 2013. The stock immediately fell 40% and was then followed by an offering, where the company raised $47 million. As a result, rumors began to spread that the trial didn't work and the company was trying to accumulate cash as quickly as possible, before results were revealed. Overall, I think it's a risky situation. The company is trading with a $230 million market cap, and if results are better than expected when announced in 2013, it could lead to incredible gains. If the results do not live up to expectations, then the loss could be great. I think there is risk with this stock, but also significant upside. I feel comfortable in suggesting that ONTY will be one of the biggest movers of the next year, but I don't know in which direction.
For biotechnology companies in particular financing is a necessary part of development. A developmental biotechnology company returns very little revenue but has to endure high costs before gaining an approval. Since biotechnology is an industry that is driven by speculation during the early years of development, investors sometime think the worse when a company elects to raise money, which is a necessary action. This action can create value and allow investors to purchase a stock much lower than it may have been prior to the offering. Investors should keep their eyes open and pay attention to stocks that fall after offerings, because they may be able to buy just prior to massive gains.